U.S. Company on How to Go Broke Selling Vodka in Russia

A worker inserts bison grass into bottles of Zubrowka vodka as they move along the bottling line inside the Polmos Bialystok SA distillery, a subsidiary of Central European Distribution Corp., in Bialystok, Poland. Photographer: Bartek Sadowski/Bloomberg

April 4 (Bloomberg) -- Going broke while dominating vodka
sales in Russia and Poland may seem tough to do. A company
founded by a Florida golfer, listed on Nasdaq Stock Market and
until recently based in New Jersey, is almost there.

Unable to repay $258 million in bonds due last month,
Central European Distribution Corp., which owns vodka brands
including Bols, Zubrowka and Parliament and once imported Dom
Perignon to Russia, is preparing to file for bankruptcy.
Creditors will vote by April 4 on a restructuring plan that
would hand CEDC to Russian billionaire Roustam Tariko,
solidifying his control of the distiller and distributor he’s
toyed with for years.

The company’s unlikely troubles show how timing and local
knowledge are crucial. After almost two decades of success in
Poland, CEDC expanded into Russia via acquisitions just as Poles
began drinking less vodka and the Russian government raised
taxes and costs to discourage alcohol consumption. The global
financial crisis, a 37 percent collapse in Russia’s currency,
and accounting errors that followed didn’t help either.

“If we had to do it over, we probably should have bought
one company to see how it went, rather than buying three within
six months,” CEDC co-founder William V. Carey, who resigned in
July as chief executive officer, said in a phone interview from
Warsaw, where he still lives. Russia’s “new regulations weren’t
there when we invested, making it much more difficult to manage
growth and profitability over the last three years.”

Cattle V. Beer

Carey, 48, a University of Florida economics graduate, had
moved to Poland after unsuccessfully pursuing professional golf.
He set up a company in 1990 exporting cattle, soon shifting into
the more lucrative business of importing beer to Poland from
brewers including Anheuser-Busch and Foster’s Group Ltd.

CEDC listed on the Nasdaq in 1998 after an initial share
sale that funded expansion into wine and other liquor
distribution, according to its website. It began manufacturing
with the company’s 2005 takeover of a distillery and Polish
vodka brand Bols. While its operational base was in Warsaw, CEDC
maintained official headquarters in Mount Laurel, New Jersey, to
manage its U.S. listing until closing the small office just
weeks ago.

Revenue peaked at $1.65 billion in 2008, the year Carey bet
heavily on Russia, acquiring stakes in three other liquor groups
within months, and agreeing to buy the rest over time.

Spending Spree

Carey spent about $1.2 billion in cash, stock and other
securities to acquire Russian Alcohol Group, the largest vodka
producer in Russia with brands including Green Mark and
Zhuravli; Copecresto Enterprises Ltd., owner of Parliament, a
top-selling vodka; and the Whitehall Group, an importer of
premium drinks to Russia including Moet champagne and Hennessy
cognac.

Then the party stopped. As global debt and equity markets
reeled and the ruble plunged, drinking habits were also
changing. Russians consumed 17 percent less vodka in 2011 than
they did in 2008, while Poles cut back by 7.7 percent, based on
volume sales compiled by International Wine & Spirit Research,
known as IWSR.

Poles developed a taste for wine, beer, whiskey and lower-alcohol flavored vodkas. Much of Russia’s decline was driven by
the Vladimir Putin-led government’s efforts to restrain alcohol
consumption by raising taxes and prices, controlling raw-material supplies, curbing sales and banning advertising --
market changes that boosted costs more than fourfold, Carey
said. It drove more Russians to the black market where as much
as half of the vodka consumed there is purchased, IWSR
estimates.

Restating Earnings

The company reported a loss of $1.3 billion for 2011,
writing down $1.06 billion in goodwill and brand value. Last
year CEDC restated exaggerated earnings for 2010 and 2011,
blaming managers at its Russian unit for failing to fully
account for customer rebates, and replaced the executives.

At its peak in July 2008, CEDC shares traded at more than
$75, giving the company a market value of $3.48 billion. Today
they trade around 30 cents, and the company has about $1.38
billion of debt. Along the way, CEDC lost the right to import
drinks to Russia from LVMH Moet Hennessy Louis Vuitton SA.

“They did too many acquisitions at the same time,”
Moody’s Investors Service analyst Paolo Leschiutta said in a
phone interview from Milan. “There was increasing competition
in Poland, which was a distraction for the management because
they focused more on Russia, and they didn’t realize that they
were losing market share in Poland.”

Poised to Rule

Meanwhile, Tariko, who parlayed his Russian Standard
premium vodka brand into a banking empire, has positioned
himself to take ownership of CEDC. He’s been investing in the
company’s troubled debt and stock since 2011, and through his
Roust Trading Ltd. unit spent more than a year negotiating --and
renegotiating -- rescue offers.

Last month he won support from some CEDC bondholders and
the company’s board for a revised restructuring plan, in which
he would take ownership, forgive debt owed to Roust and
partially repay other creditors in part with cash and new bonds.
Tariko was named CEDC chairman after Carey left, and in
September became interim president. By the end of 2012, he had
operational oversight.

A rival bid led by fellow Russian billionaire Mikhail
Fridman’s A1, CEDC shareholder and bond investor Mark Kaufman
and SPI Group, which sells Stolichnaya vodka, was withdrawn last
week, leaving Tariko’s plan unchallenged. He still needs
overwhelming creditor support and a U.S. bankruptcy court to
agree to his offer. Kaufman, who nominated Carey to return to
the CEDC board, sold his Whitehall Group to the company in 2008.

Less Than Successful

“Very few people have been successful in the Russian
alcohol business,” Kaufman said by phone before his rival
consortium’s bid was withdrawn. “CEDC had a very successful
business in Poland, but it’s not the same as Russia.”

Carey, who is working on a new business he declined to
discuss, said he’s unlikely to tackle the Russian market any
time soon.

“After living in Eastern Europe for 23 years, I’d
certainly never say never -- but I would prefer further west,”
he said.